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Trust and macroeconomic performance: A two-step approach

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  • Lim, Sokchea
  • Morshed, AKM Mahbub
  • Khun, Channary

Abstract

We reexamine the role of trust in macroeconomic performance using a new econometric method, a two-step approach adopted by Di Tella et al. (AER, 2001). In the first step, the measure of trust is constructed from the micro-regression of trust. This method allows us to extract the component of trust that is not influenced by individual-level socio-economic factors. In the second step, measures of macroeconomic performances are regressed on this improved measure of country-level trust. We find a strong positive relationship between the level of trust and real GDP per person stipulated by an increase in investment. Our results also indicate that the impact of trust on macroeconomic variables estimated by previous studies is biased upwards.

Suggested Citation

  • Lim, Sokchea & Morshed, AKM Mahbub & Khun, Channary, 2018. "Trust and macroeconomic performance: A two-step approach," Economic Modelling, Elsevier, vol. 68(C), pages 293-305.
  • Handle: RePEc:eee:ecmode:v:68:y:2018:i:c:p:293-305
    DOI: 10.1016/j.econmod.2017.07.020
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    References listed on IDEAS

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    Keywords

    Trust; Per capita income; Investment;

    JEL classification:

    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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